Mainstream Newspapers, R.I.P.

A prediction: Within the next 10 years, the Sacramento Bee and most other local daily newspapers across the nation will be out of existence. Or they will be losing so much money, they will wish they were out of business.

Why will local, paid subscription, daily papers end their 300-year run as the arbiter of America’s public life? The newspaper giants will topple because—like the steel mills before them—the industry’s profits require certain economic conditions that simply will not exist in the future. By 2006, big dailies will have lost a huge percent of their readers; forfeited their sky-high profit margins, especially in the extremely profitable classified sections; and lost much of their display advertising revenue, as companies continue the switch to target their marketing based on niche demographics.

This is not to say that companies like McClatchy Inc., Gannett, Times Mirror and the New York Times will suddenly be out of business. I do not believe that for a moment. But it is clear that newspaper chains will move their resources into other areas as dailies become less profitable.

There are those who argue that the “new media” or online “electronic newspapers” will entirely replace the ink and paper dailies in our communities. But that is not my argument here. Instead, I hope to articulate, on an economic level, why large newspaper companies will no longer produce a daily local newspaper that is distributed to the home.

Why Believe Me?
Before reading my argument about why daily newspapers are headed for extinction, there are a few things you should know about me.

I am the majority owner and publisher of the News & Review, which owns alternative weeklies in Sacramento, Chico and Reno. Over the last 16 years of publishing our paper, I have competed with three of the largest and most successful daily newspaper chains in the country—McClatchy in Sacramento, Donrey in Chico, and Gannett in Reno.

Obviously, I have a major conflict of interest in writing about the future of daily newspapers.

So why am I doing it? The answer is simple: It is a story that will someday have major impact in Sacramento and across the country, and it’s not being told. Though the future of daily newspapers is constantly being discussed by analysts and number crunchers (and is the topic of much deliberation at newspaper industry conventions) nobody has really taken this prognostication to daily newspaper readers.

Let me further confess that the idea for writing this article came out of planning sessions at the News & Review, where I was discussing with our managers how we have to start planning for a post-Sacramento Bee environment.

That being said, I’ll admit that the idea of having no more dailies scares me. Though I have often disagreed with how mainstream papers paint the world (and have worked for the last 24 years to create alternative voices to the mainstream dailies), it is hard to visualize how our democracy can function as news and information becomes more and more splintered; as fewer people share common information and perceptions as disseminated by the media. With the breakup of the television market and decline of the major networks, we seem to be headed for a country without a shared mass media.

When I listen to a Christian radio station or hear Rush Limbaugh’s show or read the ethnic press or read a Wall St. Journal editorial, I am usually stunned at how differently we all see the world. (And, of course, I know that many of you who read the News & Review are equally stunned by the world we present.) I ask myself: How can our democracy survive when most of our media underscores our differences instead of revealing our commonalities?

I do not know if this future is going to be good or bad, but I do know that it is going to very different. And for the mainstream newspaper industry, the future is coming awfully fast.

An End To High Profits
Daily newspapers are currently one of the most profitable industries in the country. Not long ago, before technology took its toll, a monopoly newspaper in a medium-size market could command a profit margin of 20 to 40 percent! And last year, the profit margin for the industry still averaged at about 12.5 percent, almost twice the profit margin of a typical Fortune 500 company.

For its part, McClatchy, Inc., made nearly 15 percent pre-tax profits last year. Assuming their average profit in Sacramento is the same as throughout the rest of their chain, the Bee’s makes a profit of about $28 million dollars a year. Ironically, this high level of profitability is precisely the reason why newspapers like the Bee will soon be out of business. In fact, an article published last year in the American Journalism Review actually advised newspaper publishers to “learn to love” lower profits … or else.

Why? Because the very factors that evolved in preventing direct competition among newspapers—the huge infrastructure of a daily newspaper with its printing plant, its distribution network and expensive reporting staff—will lead to their demise by turning them into the monsters that cannot find enough to eat.

The situation is very similar to what happened with the steel industry in the 1970s. At one time a huge steel mill’s size gave it a strong competitive advantage, but soon the micro-mills could produce steel more efficiently than the large mills. Just as the large mills’ size made them unable to compete, the daily newspaper’s huge infrastructure will soon be an albatross around the industry’s neck.

That’s why the cost of starting or revitalizing a daily newspaper is great, and the future returns are so small. That’s why no one today is starting up daily newspapers.

Readership Lost
Around 15 years ago, it became apparent that baby boomers were not picking up the daily newspaper-reading habit like their parents and grandparents. In fact, a recent study conducted for the American Society of Newspaper Editors study found that so-called “Gen-Xers” are about a third less likely than baby boomers to read newspapers daily and far more likely to agree that “reading is old-fashioned.” Meanwhile, even the boomers are reading daily newspapers less, with adult readership falling from 78 percent in 1970 to 64 percent in 1995.

The readership decline has caused many dailies to go out of business. Some of the remaining papers that picked up the circulation from the others during this “shake-out” period continued to grow in circulation, as the Sacramento Bee did when the Sacramento Union went out of business. But overall, newspaper readership continued to decline. What will happen to the surviving dailies when there are no other weaker dailies to cannibalize as the readership falls?

Some industry researchers, like those who published findings in the 1996 Veronis, Suhler & Associates Communications Industry Forecast, say the downward readership trend will turn around; that young people will develop a daily newspaper habit as they grow older. And it is true that, today, many daily newspaper gurus are in a mad search to figure out ways to change the content of daily newspapers in order to appeal to young people. They’ve tried shorter stories, longer stories. They’ve tried more entertainment and lifestyle coverage. They’ve added more TV stories.

But these attempts to fix the problem will not work. Replacing out-of-touch editors with hip, young editors or adding better, “younger” graphics will not fix the problem.

Some daily newspaper executives agree with this assessment. Here’s a quote from a speech given by the Sacramento Bee’s Frank Whitaker to the American Newspaper Publishers Association way back in May of 1991: “For years we’ve been coasting on healthy profit margins despite all the warning signs: declining household penetration; at best—flat circulation; the proliferations of a variety of alternate media; and a growing skepticism on the part of our young readers regarding our credibility and our essentialness.

“We can’t continue to put something for everyone into bigger and bigger packages and expect readers to love us and want us—they won’t.”

You Heard It Somewhere Else First …
Another reason why they won’t love newspapers is because dailies cannot solve their slowness in breaking news compared to radio, TV and the Web. At the beginning of the century, newspapers only had to compete for breaking news with other newspapers. And compete they did. Most small towns had multiple competing dailies. Many larger towns had dozens of dailies.

Today, while newspapers can still give the most in-depth look at any issue, they can rarely break a major story. Election results are known before the paper hits the porch. A plane crash interrupts regularly scheduled programming. The O.J. trial was seen live. ESPN Sport Center has already shown a five-minute video of every ballgame three times before you can read the box scores in the newspaper. The World Wide Web will bring us even more up-to-the-minute news in the near future.

So now that TV and the Web can give you the breaking news in an instant—the who, what, where and when—all that’s left is the “why.”

Unlike the “who, what, where and when,” the “why” of a story comes with a cultural context. Even though a college student, a retired state employee, an African-American shop owner, and a gay truck driver will all want to understand the “why” of a story, they will turn to quite different sources to discover it. One may turn to MTV, another to Hard Copy, another to the Sacramento News & Review, another to Pat Robertson.

Just like many other sources of the “why” about a story, the News & Review produces newspapers that 25 percent of local residents regularly read and the other 75 percent ignore. This is quite different than the almost total penetration of a community that daily newspapers used to reach. Without the ability to break major new stories, daily newspapers will not be able to bring all segments of a community together to read the same paper. Their audience share will continue to drop.

The Bee Or Not The Bee?
One way to predict what is going to happen during the next 10 years is to look at what has happened during the past eight years.

First, using data from International Demographic, we can compare the Bee’s readership numbers from 1988 with the figures they’ve generating now. What is so striking about this comparison is not just that daily newspaper readership has gone down, but that it has gone down so much faster among 18- to 49-year-olds as compared to those over 50.

Plugging in expected 2006 census data for each age group with the down-spiraling readership trends creates real problems for daily newspapers. Assuming that older people are going to keep dying at a much faster pace than younger people, daily newspaper readership could drop another 20 percent in 10 years.

And, as if losing one out of five readers wasn’t drastic enough, the real bad news is the age composition of the 2006 Sacramento Bee readers. The percentage of weekday readers that will be 65 years or older will increase from 10 percent in 1988 to 30 percent in 2006. At the same time, the percentage of 18-to-34-year-old readers will drop from 44 percent in 1988 to 20 percent in 2006. And the decline will mainly happen among younger readers, who also happen to be in their prime consuming years, when individuals establish shopping patterns.

This trend will have a huge effect on the Bee’s ability to sell retail advertising based on certain age groups. If a television show suddenly attracts 20 percent more viewers, the ads on the new show will create 20 percent more response for the advertisers. Because they are providing 20 percent more return, the television station can charge 20 percent more for the ads. What is so remarkable about the rate hike is that it is almost all profit. The film costs the same, the actors are paid about the same, the rent is the same—but the profits are up 20 percent.

There are similar economics in the newspaper industry. What is different for newspapers is that when circulation increases, the industry has to print and distribute additional papers. That costs money and cuts into the profit margin.

The major financial impact of losing readers will be on how much newspapers can charge for their advertising pages. In rough terms, a 20 percent drop in readers will mean a 20 percent drop in advertising rates. If the Bee’s rates declined 20 percent, it would cost the Bee around $18 million a year.

Even after cutting off $18 million from the Bee’s bottom line, the company (based on last year’s profit margin) would still clear roughly $10 million in pre-tax profit, enough to continue publishing for years.

Except for the Web.

Classifieds’ Inevitable Move To The Web
There are all kinds of predictions about what the online medium will mean for the future, but one thing is certain: It’s a medium made for classified listings—i.e., for helping people effectively buy and sell things. Web search engines will enable a user to quickly search for the job listings, homes for sale and available automobiles.

The Web already offers free or nearly free classified listings for employment, housing and real estate. The U.S. Department of Labor has more than 300,000 free job listings. Some real estate companies have already put their homes online with more planning to come online.

These were categories where the dailies once had little competition, and therefore were able to charge top dollar. These same high prices will help drive classifieds to the low-cost Web. As the Web becomes more popular, a daily newspaper’s classified section—with its minimal information on a small number of listings—will not be able to compete with a Web page with its lower ad rates, far larger database of information and many more listings.

When people ask me, “How will individuals without access to a computer get these classifieds?” my response is simple: The audience will follow the database. If the best classified database is on the Web, somebody will find a way to make money providing that information to people, maybe even by printing out classified information at Kinko’s.

That is why, over the next 10 years, the Web will effectively eliminate classified advertising as the most significant revenue source the dailies have.

Classified research recently conducted by the Newspaper Association of America seems to concur: “Advances in technology encouraged competitors. … Now these new players have created a natural wedge between newspapers and advertisers. They’re offering lower prices, better service and more information than newspapers. They’re eating away at newspaper franchises. Creating a new market for classifieds we no longer control.”

As an ex-paperboy, a longtime newspaper reader and a current newspaper publisher, I love newspapers. I love the feel, the portability, the familiarity. But when looking to buy a new house, I would much rather see 100 percent of the houses in the neighborhood—with a picture and a detailed description of the homes that only the Web will be able to provide—than look in a newspaper where traditionally, only a small percentage of the homes are listed and you get very little information. Or if you are looking for a low-cost automobile, you will go online because there you soon will be able to find the same information that’s in a newspaper classified section, plus you could quickly check other related information—say, the car’s Kelley Blue Book value or its Consumer Reports rating.

I find that the train analogy is helpful in understanding why classifieds will switch over to the Web. If you compare trains and airplanes, then you find that trains have many advantages over planes. The seating is roomier, your luggage stays with you, you can walk around, and you arrive in the center of town. In many ways, trains are nicer than planes. The advantage that planes have is one: It takes only a few hours to fly across the country on a plane.

So, which do you choose?

Although a newspaper has many features that make it more desirable than the Web—including the “you can’t take it into the bathroom” argument—newspapers will never be able to compete with the Web for processing a classified database.

So, over the years, classified advertising will move to the Web. And though classifieds only represent 38 percent of most dailies’ advertising revenue, they represent the majority of dailies’ profits.

How would loss of classifieds affect the revenue stream at an average daily? Well, the Bee currently runs about 225 classified pages a week and earns around $4,000 per page—$900,000 per week—after printing and production expenses have been taken out. If 80 percent of their classified pages are lost to the Web, or if they have to reduce those prices to “Super Sellers” prices, then the Bee would lose around $720,000 per week or nearly $37 million during the year.

These events will increase the sense of overall crisis for dailies. In the Bee’s case, the loss of classified net revenue combined with the $18 million expected decline in advertising revenue based on readership loss will not only wipe out the Bee’s remaining $10 million profit, it will leave the company a $27 million-a-year hole—a hole that can’t be filled.

My Lessons In Capitalism
I have learned a lot about capitalism out of competing with three gigantic daily newspaper chains that, during the last 16 years, have been actively trying to take me out of business.

In the mid-1980s, after publishing a small alternative weekly newspaper—the Chico News & Review—on a subsistence, hand-to-mouth basis, the daily paper that we were (and still are) competing against, the Chico Enterprise-Record, was sold to the large Donrey newspaper chain.

After laying off some reporters and doing other things to make the paper more profitable, Donrey sent in its rising star, Dave Osborne, to be the new publisher in Chico. We invited Dave over for an interview, and as he walked through our building, he kept saying, “If I had been here five years ago, you guys never would have been here.” We were left with the impression that he had no intention of letting us stick around five years in the future.

Indeed, a few months after his arrival, Donrey launched its own free, alternative paper called “Off the Record.” It featured our column sizes (not the dailies’), was distributed to our locations, and offered editorial copy geared to young people—but without the controversial nature of the News & Review. Most importantly, because it was funded by Donrey, the advertising rates were very low.

We had no deep pockets, no backing, and we were scared to do battle with an adversary as big as Donrey. But we had no choice. So we just kept doing what we were doing and hoped for the best. Lucky for us, their editorial product—geared for young people but not controversial, especially to older business owners—was very boring. So, the college students and our readers found Off the Record boring and stopped reading it. Without readership, the advertisers did not receive results, so they stayed with us. In fact, our growth rate went up during the first year of Off the Record.

That experience prepared me for dealing with McClatchy, Inc., when we came to Sacramento in 1989. As opposed to Donrey, which has a national reputation of putting out lousy newspapers, McClatchy is considered to be one of best-run newspaper chains in the country.

After we announced that we were going to start an alternative paper here, but before we had started publishing, I was invited out to lunch by Frank Whittaker, the Bee’s publisher and an individual whom I believe to be one of the smartest in the newspaper industry.

After a few minutes of him asking me what we were going to do (and me not telling him), Frank dropped the bomb. He said he wanted me to know that the Bee took us coming to town very seriously. I replied that I was very flattered, but I did not see how my coming to Sacramento should really concern him because if the News & Review were able to get even 1 percent of all the advertising dollars spent in Sacramento, I would be amazed.

Frank said, “1 percent is 1 percent” and added that there ought to be a way for the Bee to string some publications together to prevent the News & Review from getting that 1 percent.

I went for a long walk that night, thinking about what he meant. A couple of days later, Frank called me at home to tell me about a marketing job at the Bee that paid $80,000 a year. He wondered if I knew anyone who might be interested in it. I told him that I did not know of anyone, but I would call him if I thought of someone. I was bringing home less than $30,000 at the time.

Between this call and the Bee refusing to run our help-wanted ads, I knew that it was going to be a battle in Sacramento. Indeed, a few months later, the Bee launched Ticket, a Friday tabloid entertainment publication geared to younger readers that boasted extra free distribution using the same distribution points as the News & Review.

Next, the Bee announced special introductory pricing for non-Bee advertisers (meaning, of course, our advertisers) that enabled clients to run in the much larger Bee for the same cost as the News & Review. Believe me, I took an even longer walk that night.

There was nothing to do but fight, so we did. And our growth rate and readership continued to climb. And they still do today.

War or Nature?
For me, competing with both these aggressive companies—each about 100 times bigger than us—has changed the way that I view capitalism. Before these experiences, I thought that a “war model” was the best way to understand business competition. In war, the country that brings the most firepower and has the most resources usually wins. So in a battle with Donrey and McClatchy, I should have been dead meat.

But I’ve come to realize that the war model is not an accurate way to understand business competition. I think a “nature” model is a much more insightful way to gain an understanding of how things are going to play out in the media future, especially as use of the Web continues to grow.

In a nature model, the News & Review, the Bee and, in fact, all other businesses are trying to make sure that they can get enough to eat, can reproduce and are not eaten by somebody else. Currently, the News & Review is a $3 million business, and the Bee is a $188 million business. In the nature model, you don’t think about which company has the most resources, but rather that the News & Review needs to find 3,000 calories a day to survive, and the Bee needs 188,000 calories a day.

Which one is most likely to get its needed calories?

In essence, I believe the environment is changing in a way that ensures that the daily will not be able to find enough food to survive. The large size that made dailies so successful in one environment will work against them in the next.

How does the News & Review fit into this new environment?

I am not sure, though I am sure that we have a much better chance of survival than the Bee. But I do not believe that it is totally clear sailing for our paper, either. Just as the alternative newspaper industry was made possible because of the invention of cold type, now evolved into desktop publishing, I believe that the Web will create new media creatures that will be able to live on 500 calories a day. And a few hundred 500-calorie businesses may turn out to be a lot more threatening to the News & Review than a giant company—like a big daily newspaper—that needs 188,000 calories.

Who knows what the future holds?

One thing seems certain: The days of wide circulation and great profits for the dailies are coming to a historic end over the next decade, though not in the short-term time frame of Wall Street, which rarely seems to see past next quarter’s earning report.

But like nature, capitalism has no reverence for what should be, only what is. When a species’ death rate is higher than its reproductive rate, that species goes extinct. When a company or an industry’s expenses are higher than its income, it goes out of business.

But life does not go out. Instead, new, more efficient species evolve.